IRAQ STUDY GROUP – FINAL REPORT (PAGES 22 & 23)

Oil Sector

Oil production and sales account for nearly 70 percent of Iraq’s GDP, and more than 95 percent
of government revenues. Iraq produces around 2.2 million barrels per day, and exports about 1.5
million barrels per day. This is below both prewar production levels and the Iraqi government’s
target of 2.5 million barrels per day, and far short of the vast potential of the Iraqi oil sector.
Fortunately for the government, global energy prices have been higher than projected, making it
possible for Iraq to meet its budget revenue targets.

Problems with oil production are caused by lack of security, lack of investment, and lack
of technical capacity. Insurgents with a detailed knowledge of Iraq’s infrastructure target
pipelines and oil facilities. There is no metering system for the oil. There is poor maintenance at
pumping stations, pipelines, and port facilities, as well as inadequate investment in modern
technology. Iraq had a cadre of experts in the oil sector, but intimidation and an extended
migration of experts to other countries have eroded technical capacity. Foreign companies have
been reluctant to invest, and Iraq’s Ministry of Oil has been unable to spend more than 15
percent of its capital budget.

Corruption is also debilitating. Experts estimate that 150,000 to 200,000—and perhaps as
many as 500,000—barrels of oil per day are being stolen. Controlled prices for refined products
result in shortages within Iraq, which drive consumers to the thriving black market. One senior
U.S. official told us that corruption is more responsible than insurgents for breakdowns in the
oil sector.

The Politics of Oil

The politics of oil has the potential to further damage the country’s already fragile efforts to
create a unified central government. The Iraqi Constitution leaves the door open for regions to
take the lead in developing new oil resources. Article 108 states that “oil and gas are the
ownership of all the peoples of Iraq in all the regions and governorates,” while Article 109 tasks
the federal government with “the management of oil and gas extracted from current fields.” This
language has led to contention over what constitutes a “new” or an “existing” resource, a
question that has profound ramifications for the ultimate control of future oil revenue.

Senior members of Iraq’s oil industry argue that a national oil company could reduce
political tensions by centralizing revenues and reducing regional or local claims to a percentage
of the revenue derived from production. However, regional leaders are suspicious and resist this
proposal, affirming the rights of local communities to have direct access to the inflow of oil
revenue. Kurdish leaders have been particularly aggressive in asserting independent control of
their oil assets, signing and implementing investment deals with foreign oil companies in
northern Iraq. Shia politicians are also reported to be negotiating oil investment contracts with
foreign companies.

There are proposals to redistribute a portion of oil revenues directly to the population on a
per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the
nation’s chief natural resource, but it would take time to develop a fair distribution system. Oil
revenues have been incorporated into state budget projections for the next several years. There is
no institution in Iraq at present that could properly implement such a distribution system. It
would take substantial time to establish, and would have to be based on a well-developed state
census and income tax system, which Iraq currently lacks.

Section 1314 of the FY2007 Supplemental Appropriations Act
[P.L.110-28]:

Sec. 1314. (a) Findings Regarding Progress in Iraq, the Establishment of Benchmarks to Measure That Progress, and Reports to Congress.--Congress makes the following findings:

...

(b) Conditioning of Future United States Strategy in Iraq on the Iraqi Government's Record of Performance on Its Benchmarks.--

...

(A) The United States strategy in Iraq, hereafter, shall be conditioned on the Iraqi government meeting benchmarks, as told to members of Congress by the President, the Secretary of State, the Secretary of Defense, and the Chairman of the Joint Chiefs of Staff, and reflected in the Iraqi Government's commitments to the United States, and to the international community, including:

...

(iii) Enacting and implementing legislation to ensure the equitable distribution of hydrocarbon resources of the people of Iraq without regard to the sect or ethnicity of recipients, and enacting and implementing legislation to ensure that the energy resources of Iraq benefit Sunni Arabs, Shia Arabs, Kurds, and other Iraqi citizens in an equitable manner.